Cost of living continues to climb

Published by Rebecca Atkinson on 16 September 2008. Last updated on 21 December 2009

Energy price hikes and the rising cost of food such as pizza have pushed inflation further away from its 2% target, with the Consumer Price Index (CPI) hitting 4.7% in August.

Figures show that the CPI – the official measure of inflation – leapt from 4.4% in July to 4.7% in August, more than double its target mark of 2% and its highest level since 1992. The jump means the governor of the Bank of England, Mervyn King, will be forced to write to Alistair Darling to explain why prices continue to rise.

The jump in the cost of living has been pinned on electricity prices increasing 18% in August, from the same month in 2007, and gas prices by 27.7%.

The UK’s six biggest energy firms all increased their prices during July and August, with some customers facing forking out up to 35% more to light and heat their home.

The Office for National Statistics, which produces the CPI, says rising food prices are also to blame for the higher cost of living, reaching a record 14.5% on the year.

This was largely due to a rise in cereals and breads, particularly breakfast cereals and pizzas. Bread and cereals rose to 17.4 % on the year, meat prices reached 17.1% year-on-year, with the largest effect from pork products.

However, falling property prices contributed to the first drop in the Retail Price Index (RPI) for five consecutive months. RPI inflation, which includes housing costs and mortgage interest payments, dipped to 4.8% last month from 5% in July. The Office for National Statistics claims the fall was down to keeping interest rates on hold this year.

Last year many lenders passed on the quarter-point increase in interest rates which led to an increase in mortgage repayments.

Interest rates

Despite the rise in inflation, the fact that the economy continues to stall means many analysts believe that the case for an interest rate cut has become much stronger.

Jonathan Loynes, the chief European economist at Capital Economics, forecasts that inflation will continue to rise over the next few months but will fall sharply over the next year. “We don’t see these figures as a serious impediment to lower interest rates,” he said. “A November cut is still on the cards.”

Although August's inflation figure doesn't rule out an interest rate cut, cash-strapped consumers are still struggling to cope with the rising cost of food and drink, with prices rising by more than last year.

Research by mySupermarket.co.uk shows the price of all food and drink products has increased by an average of 5.9% - well above the official rate of inflation.

For hard-pressed families the price of a weekly basket of staple food is even higher, increasing by 20% over the past year for 24 staple items. For a family of four spending around £100 on their weekly groceries, this would equate to a price hike of £1,040 per year.

“Our regular purchases are those which are being hardest hit by the rising price of commodities and fuel, so shoppers still need to keep a close eye on what they’re spending,” says Johnny Stern, director of mysupermarket.co.uk. “We would advise shoppers trying to stick to a tight budget to look out for better priced like-for-like items and special offers.”

Neil McKinnon, chief economist at ECU Group, believes that the price of food will continue to rise while the pound remains weak. “A weak pound means that imported goods become more expensive. This has massive financial consequences for the wider economy, and makes the case for a rate cut sooner rather than later even stronger.”

McKinnon claims that the fall in the pound’s value is the worst it has been since 1992. “This will lead to more expensive food and fuel for us all - until the Bank of England bites the bullet and gets interest rates down to growth levels, we will continue to suffer.”